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FHA Short Refinance Plan
As of August 10, 2010 the U.S. government started rolling out a program that would make it easier for underwater homeowners to undergo a ?short refinance? with the goal to keep people in their homes. A short refinance is similar to a short sale in that a bank agrees to accept a lower amount than the full balance in order to pay off an existing mortgage. Unlike a short sale, however, in a short refinance the homeowner can continue to live in his or her house. The bank forgives a portion of their mortgage balance and will typically rewrite the loan with a lower interest rate and/or extend the term of the loan. These steps should reduce the monthly payment of the homeowner, making it possible for them to complete their loan obligations rather than be forced to go into a foreclosure or short sale.
The new government program, known as ?FHA Short Refinance? differs from previous programs in several ways. Unlike previous programs, homeowners must be current on their current mortgage payments. Homeowners must also be able to prove that they are currently underwater with their present mortgage, in other words, they must owe more than the house?s current appraised value.
There are several rules that must be followed in order to use this program, however. The bank must agree to rewrite the loan and forgive at least 10% of the balance owed. The new loan is also required to not finance more than 97.75% of the home?s present value. Since the loans will be backed by the FHA, the homeowner must purchase private mortgage insurance or ?PMI? to protect the bank in case they default on the loan. In some areas, this insurance may cost up to $200 a month, and might negate any savings that the homeowner would see from having some of the loan balance forgiven. There is also no limit on the amount of fees and closing costs that the bank can charge the homeowner.
It is unclear if banks will be willing to do this, as previous programs encouraging lenders to forgive a portion of a homeowner?s mortgage balance have failed. The motivation for a bank to participate would be to avoid the costly process of a foreclosure or short sale. With so many homeowners dragging out foreclosure proceedings, banks will often lose one to two years of mortgage payments before being stuck with a property with extensive damage, making it next to impossible to sell. By agreeing to a short refinance, the bank can avoid these problems and still make a profit on the loan.
The government hopes that this program will stabilize housing prices in areas of the country that have experienced a lot of fluxuation in the cost of housing. The program is also intended to stabilize the neighborhoods and house values of the neighboring properties that take advantage of this program. By keeping people in their homes a neighborhood does not have to deal with the blight of an unkept, foreclosed property.
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